<aside> 💡 Figuring out what your business is worth is key when you’re ready to sell, as it helps you set a fair price. We’ll look at different ways to calculate its value, like using assets, income, or market comparisons. By understanding these methods and using the tips below, you’ll be better equipped to price your online business right and make the most of it in the market.

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Different Valuation Methods

Buy vs Build

You're essentially answering the question of how much it would cost to build the company yourself from scratch (including marketing expenses to reach the same revenue level). Consider these elements :

• your time
• development hours
• designer hours
• fixed assets
• marketing ads
• one-time tools
• …

Income-Based Valuation

This method values a business based on its income-generating potential. It includes techniques like :

• Discounted cash flow (DCF) : calculates the present value of expected future cash flows, factoring in the time value of money. Imagine valuing a tree by estimating how many fruits it will bear over the next five years. In the same way, valuing a business means projecting its future cash flow and assessing the returns it’s expected to generate. There is 3 components :
  • Future Cash Flow
  • Discount Rate : discount back to today
  • Terminal Value
• Capitalization of earnings methods : uses past or projected earnings to estimate the business’s overall worth.

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Here's an example of software valuation based on its cash generation and the feasibility of financing the acquisition with a loan.

Here to duplicate the document :

Source : Skaling Ventures

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Market-Based Valuation

This method determines a business’s value by comparing it to similar companies in the market. It uses metrics like :

• Price-to-earnings (P/E)
• Price-to-sales (P/S)

This approach works best when there is a strong market for similar businesses and data to support the comparison.

However, in the online business and digital asset market, finding comparable data and clear pricing remains challenging. On marketplaces like Acquire or Flippa, the price is set by the sellers based on their asking price, not on actual data transaction history (be careful).

Asset-Based Valuation

This method assesses a business by considering both its tangible and intangible assets :

• Tangible assets : physical items such as equipment, inventory, property…
• Intangible assets : intellectual property, brand reputation, customer relationships, goodwill…

Asset-based valuation works well for businesses with significant physical assets or those that rely heavily on asset investment.

For instance, in the software market, valuing a business by assets is challenging because there are typically very few tangible assets, such as laptops or domain names.

Price your Business

Use a multi approach that considers several key factors :

1. Financial Statements

• Gather accurate, current financial statements : profit and loss (P&L), balance sheets, and cash flow.
• Review historical performance to understand revenue growth, profitability, and cash flow.
• Adjust statements to reflect a normalized view, accounting for one-time expenses or non-recurring revenues.

2. Future Earnings Potential

• Evaluate future earnings by examining market trends, growth opportunities, and competitive dynamics.
• Consider factors like demand, customer retention, scalability, and industry innovation.
• Market research on similar businesses helps project growth and profitability.

3. Intellectual Property and Brand Value

• Assess intellectual property assets, including trademarks, copyrights, patents, and proprietary technology.
• Evaluate brand strength, market recognition, and potential revenue generation.
• Factor in customer relationships, databases, and exclusive partnerships.

4. Comparable Sales and Transactions

• Review recent sales of similar online businesses to understand market valuation trends.
• Focus on transactions matching in size, revenue, business model, and growth potential.
• Use financial multiples and terms from these deals to identify a valuation range for your business.

Buy Then Build by Walker Deibel

Can the business afford itself ?

In Buy Then Build, Walker Deibel introduces the idea of a business "affording itself." This concept asks whether a business can generate enough revenue to cover the debt taken on to acquire it. Essentially, if you take out a loan to purchase the business, can the business’s cash flow support loan repayment without jeopardizing operations or growth ? This approach, also known as leveraged buyout (LBO) or acquisition financing, is a common tactic for acquiring small businesses.

How to Buy a Small Business from Harvard Business Review

Evaluating the "debt capacity”.

How to Buy a Small Business from Harvard Business Review expands on this, recommending that buyers assess a business’s cash flow, stability, and growth potential before purchasing. It also suggests evaluating the "debt capacity" of the business, considering factors like:

1. Cash Flow Analysis : Understanding how much consistent cash flow the business generates and if this can reliably service debt payments.
2. Profit Margins : Evaluating whether the business maintains strong profit margins, which indicate resilience and room to cover loan obligations.
3. Growth : Considering potential for growth to increase revenue over time, which can create a buffer for debt repayment and profitability.
4. Risk Assessment : Assessing any market or operational risks that could impact revenue, ultimately influencing the ability to pay down debt.

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Sources

• *Buy Then Build by Walker Deibel*

• *How to Buy a Small Business from Harvard Business Review*

• *Skaling Ventures :*

  • *https://www.youtube.com/watch?v=OJyqaTU22Ww*
  • https://skalingventures.substack.com/p/the-1-factor-to-determine-max-valuation?utm_source=publication-search

• *https://acquire.podia.com/how-to-buy-startups*

• How to Sell a Business : A Step-by-step Guide by Flippa :

  Flippa's Guide.pdf

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